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Step ahead of shadow banks and stay within your risk appetite

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Today, banks around the world are still dealing with the regulatory and competitive aftermath of the global financial crisis. In the years following the crisis, when banks retreated from riskier forms of lending, a myriad of shadow banking firms stepped into the void. In recent years, as this article in The Economist reveals, private-equity firms and other shadow lending institutions have been “deliberately expanding into areas where banks are retreating” and making significant profits in the process.

The 2015 Global Shadow Banking Monitoring Report by the Financial Stability Board (FSB), a global financial watchdog, reveals that asset growth in shadow banking is outpacing the banking sector — the shadow banking sector accounting for roughly a quarter of total financial assets worldwide, compared to about half within the banking system. Based on reporting from authorities within 20 jurisdictions and the euro area, the FSB report shows that credit intermediation by other financial intermediaries has been increasing steadily since 2010, reaching $29 trillion in 2014. This growth was led primarily by fixed income investment funds, with jurisdictions such as Hong Kong and Japan experiencing the fastest expansions.

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